Betting Big Money On The Weather
Wall St. will bet on almost anything. That was proven when mortgage-backed securities and insurance on them nearly took down in the American economy in 2008. A recent form of gambling is a little less risky, but the bets are on a highly volatile item. That is the weather.
*Weather Impacts
According to Semafor, the investments are called “weather derivatives.” The more violent the weather swings, the better. A weather forecast based on benign conditions drives the most common bonds. The payouts are based on deviations.
These instruments can be used as hedges. Farmers can use them as financial protection if rain or drought hurts their crops. Solar companies, Bloomberg points out, can use them as a hedge against cloudy weather.
Better On Temperatures
Some of these are traded on the CME. According to Bloomberg, “Using so-called heating degree days (HDD) and cooling degree days (CDD) as parameters, they pay out when temperatures deviate from daily averages against an 18C baseline.”
Weather derivatives have become more popular over the last several years. That makes sense. The weather has become more volatile. There are more huge storms, violent floods, drought and wildfires. On paper, that means investors can make more money–or lose more.
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